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Calling it a ‘reality check’, analysts and experts believe that Cognizant’s lower-than-expected revenue growth guidance for 2014 reflects that even as information technology (IT) services companies will see growth during this year, it is unlikely to be dramatic.
Earlier this week, the US-headquartered company, which follows the same offshore delivery model like Indian IT services companies, posted a modest Q4 revenue growth and shared a conservative revenue growth guidance of 16.5%. At a time when the industry is expected to perform better than a year ago, Cognizant's guidance for this year is lower than the 20% guidance it had given for 2013.
“(Cognizant’s) guidance overall is creditable, especially against the backdrop of larger scale though it falls marginally short of Street’s expectations. These results will keep runaway expectations with Indian IT in check, healthy in our view,” said Kotak Institutional Equities’ analysts Kawaljeet Saluja, Rohit Chordia and Shyam M. in a note published on Wednesday.
“We expect calendar year 2014 to be a better year for the industry despite higher base. We expect Indian IT stocks to deliver more moderate but respectable 10-15% returns in CY2014,” they added.
While Cognizant benefited from the uptick in discretionary spending during the April-December period of 2013, analysts say it is too early to assume that the trend will continue going forward.
However, some experts are of the view that Cognizant’s guidance should not be the parameter to judge the company’s Indian peers, who are currently benefitting from the uptick in Europe where Cognizant has a limited presence. Some analysts said the company’s weak presence in Europe could have had a bearing on its performance.
“According to the management (of Cognizant), the growth opportunity is stronger in Continental Europe where there is increased acceptability of global delivery model. However, clients from North America continue to invest in newer technologies along with higher penetration of newer services like infrastructure management services. Indian IT peers have stronger presence in Europe and likely to reap benefits of the same,” said analyst Shashi Bhushan of Prabhudas Lilladher in a note.
Investors have remained buoyant about the Indian IT services sector over the past several quarters, as companies started to see a revival in demand amid strengthening macro-economic environment in major markets--the US and Europe. Street’s faith in a stronger growth going forward was further reaffirmed when at the end of the recently ended October-December 2013 quarter, all large IT services companies reiterated that they expected better times ahead. The improvement in demand has been reflected in several parameters such as guidance and hiring.
India’s largest IT services company, Tata Consultancy Services continued its uptick in hiring, and last month upped the numbers to 55,000 from its earlier stated 50,000. The company also stated that initial discussions with clients suggest a better year ahead. The second largest player in the sector, Infosys raised its revenue growth forecast for the financial year ending March 2014 to a higher-than-expected 11.5-12% from 9-10% earlier.
Also, the October-December 2013 earnings of Wipro threw up several surprises, with the company performing better-than-anticipated for a second quarter in a row. Reacting to the earnings, shares of Wipro had touched an over 10-year high.
“The commentary from Tier-1 Indian IT companies and Cognizant has been encouraging. The growth continues to be skewed towards Europe, pick-up in discretionary spend and early signs of uptick in IT budget. However, softer-than-expected guidance caps the IT industry’s growth expectation,” said Shashi Bhushan of Prabhudas Lilladher.
Kotak Institutional Equities expects the Tier-1 IT services companies (Infosys, Wipro and TCS) to grow 12-16% in the next financial year starting April 2014, as it said it builds in the assumption that growth in IT budgets would be higher than 2013, and recogonising the challenge of growth on increasing base.
“We believe that the discussions on growth prospects for large companies such as TCS had started veering towards the 20% mark; Cognizant’s guidance is a nice reality check,” it said.'
